Airtel, RCom profits may fall; regulation key

New Delhi: Bharti Airtel and Reliance Communications , India’s top two mobile carriers, should report lower quarterly profits on thinner margins and higher costs, with markets eyeing the take-off of 3G services.

India’s mobile market is the world’s second-biggest and the fastest growing, but a probe into allegations that telecoms licences and radio airwaves were given out too cheaply is a big overhang on the industry.

The fate of dozens of licences, including those held by the Indian ventures of Telenor and Etisalat hang in balance after a state auditor said they were not eligible to get the licences.

The licence row mostly involves startups, smaller and newer firms, but companies including Bharti also face risks of having to pay more for the second-generation spectrum they hold.

India is yet to decide whether it will demand more fees for radio airwaves, after a state auditor said the government has lost as much as $39 billion in potential revenue due to the cheap sale of licences and airwaves in 2007-08.

“I think the downside for companies like Bharti is limited,” said R.K. Gupta, managing director at Taurus Asset Management in New Delhi. “Once they launch 3G services, it will add to their valuations. And if there is any action against the smaller companies, it will be favourable for big players,” he said.

3G services

Companies spent a total of nearly $15 billion to buy third-generation spectrum in an auction in May 2010, which saw bids coming at much higher levels than expectations and saw no company getting airwaves for all of India’s 22 zones.

Bharti and Idea are yet to launch the premium data services, which should improve their margins in a market where close to 90% of operators’ revenue is from low-margin voice calls.

Reliance Communications has launched 3G services in some areas.

On Thursday, India launched mobile number portability (MNP) that would allow users to retain their numbers when they switch operators, meaning more competition among firms to retain their subscribers. But most analysts do not expect MNP to lead to another price war.

Earnings for Bharti, India’s leading outsourcer, should have take a hit in the December quarter due to weaker margins from its African operations, which it acquired in June 2010 in a $9 billion deal.

The African operations had made losses in the September quarter and the company has cut call prices in many countries including Kenya, sparking a price war. Bharti operates in 19 countries across Asia and Africa.

However, the Indian market is improving after a bruising competition sent call prices tumbling in late 2009. No significant price cuts have happened the past three quarters.

Reliance Communications has so far been unsuccessful in its fund-raising plans to reduce its heavy debt, which stood at $6.3 billion at end September.

The company is looking to sell stake in its tower business, and is also hunting for a strategic investor to sell up to 26% in itself.

Idea’s profits should rise on higher subscribers and minutes growth and as call prices remained stable.

Following are December quarter forecasts based on a Reuters poll of 12 brokerages.